JUDGMENT
Balakrishna Eradi, C.J.
1. These two references, involving a common question of law, have been made to this court by the Income-tax Appellate Tribunal, Cochin Bench (hereinafter called “the Tribunal”), under Section 256(1) of the I.T. Act, 1961 (for short ” the Act “), at the instance of the Commissioner of Income-tax, Kerala. They arise out of assessments made against the same assessee, a limited company, for the years 1971-72 and 1973-74.
2. I.T.R. No. 14 of 1976:
For the year 1971-72, the company was assessed on a total income of Rs. 24,74,230. In the course of the accounting year the assessee had made donations amounting to Rs. 50,000. These donations were eligible for deduction under Section 80G of the Act to the extent of 50% of the sums donated. The assessee had been allowed such deduction while computing the taxable income for I.T. assessment purpose and the assessee’s income mentioned above had been arrived at after such deduction.
3. For the purpose of assessment to surtax under the Companies (Profits) Surtax Act, 1964 (hereinafter called the “Surtax Act”), the ITO took the aforesaid amount of the assessee’s income as the basis for arriving at the chargeable profits. Accordingly, in computing the chargeable profits of the assessee-company under the provisions of Rule 1 (vii) of Sch. I, he deducted Rs. 25,000, being 50% of the amount of donations on which exemption under Section 80G was allowed. While computing the capital of the company for the purpose of the Surtax Act according to Sch. II, the ITO did not make any adjustment in respect of the donations for which the deduction
had been allowed. Thus, the chargeable profits was fixed by the ITO at Rs. 2,04,265 and the assessment to surtax was finalised accordingly.
4. The Commissioner of Income-tax, acting in exercise of the power vested in him under Section 16 of the Surtax Act, took the matter in suo motu revision and after issuing a notice to the assessee and hearing the parties he passed an order setting aside the assessment to surtax made by the ITO and directing the ITO to make a fresh assessment after taking into account the amount of donation in respect of which deduction had been allowed under Section 80G of the Act for the purpose of computation of capital under Rule 4 of Sch. II. The Commissioner held that while computing the capital as per Sch. II to the Surtax Act the ITO ought to have made a proportionate adjustment in respect of the amount for which deduction had been allowed under Section 80G of the Act. In the view of the Commissioner the amount covered by such deduction granted under Section 80G constituted part of the income of the assessee “not includible in its total income as computed under the Income-tax Act” for the purpose of Rule 4 of Sch. II to the Surtax Act and hence the capital as computed in accordance with Rules 1 to 3 thereof is required to be diminished proportionately.
5. The assessee carried the matter in second appeal before the Tribunal. The Tribunal was of opinion that the decision of the Karnataka High Court in Stumpp, Schuele & Somappa Pvt. Ltd. v. Second ITO [1976] 102 ITR 320 was directly in point and following the dictum laid down therein it held that the expression ” income, profits and gains of a company not includible in its total income as computed under the I.T. Act” occurring in Rule 4 of Sch. II to the Surtax Act refers only to those sums which are not includible in the total income by virtue of the provisions of Chap. III of the I.T. Act and does not refer to any of the deductions claimable under Chap. VI-A of the Act. “The appeal filed by the assessee was accordingly allowed by the Tribunal.
6. At the instance of the revenue, the following question of law has been referred to this court by the Tribunal as arising out of its aforesaid order passed in the appeal relating to the assessment year 1971-72:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that in the computation of capital according to Rules in the Second Schedule of the Companies (Profits) Surtax Act, 1964, the donations for which the assessee got a deduction u/s. 80G of the I.T. Act, 1961, need not be considered and a proportionate deduction made in the computation of the capital ?”
7. I.T.R. No. 62 of 1976.
During the accounting period relevant to the assessment year 1973-74, the assessee had paid donation of Rs. 82,500 for which the company was entitled to a deduction to the extent of 50% under Section 80G of the Act.While computing the capital of the company under Sch. II of the Surtax Act for the purpose of making the surtax assessment, the ITO held that the capital of the company had to be diminished by an amount proportionate to Rs. 41,250, being the deduction allowed to the assessee under Section 80G of the I.T. Act, for arriving at the taxable income. The contention put forward by the assessee that the deduction allowed under Section 80G will not fall within the scope of Rule 4 of Sch. II to the Surtax Act was overruled by the ITO. The AAC, before whom the assessee took the matter in appeal, confirmed the assessment made by the ITO. The assessee filed a second appeal before the Tribunal and that appeal was allowed by the Tribunal following the decision already rendered by it in favour of the same assessee in the appeal relating to the assessment year 1971-72. On an application made by the Commissioner under Section 256(1) of the Act read with Section 18 of the Surtax Act the Tribunal has referred the following question of law to this court:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the sum of Rs. 41,250, being 50% of the donation made by the assessee-company and deducted under Section 80G of the Income-tax Act, 1961, is an item includible in the total income of the assessee and that the capital of the company is not to be decreased correspondingly for the purpose of Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?”
8. Section 4 of the Surtax Act lays down that surtax under the said Act shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in Sch. III. The expression “chargeable profits” has been defined in Section 2(5) to mean the total income of an assessee computed under the I.T. Act, 1961, for the previous year or years, as the case may be, and adjusted in accordance with the provisions of Sch I. Clause (8) of Section 2 defines the expression “statutory deduction”. The said clause, as it stood at the relevant time, was in the following terms:
“‘Statutory deduction’ means an amount equal to ten per cent, of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater:
Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten per cent, or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately :
Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration.”
9. The Second Schedule to the Surtax Act contains the rules for computing the capital of a company for the purpose of levy of tax under the said Act. Rule 4 contained therein reads :
“Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with Rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.”
10. The question for consideration in these two references is whether that part of the income of the assessee-company, in respect of which the company has been allowed a deduction under Section 80G of the Act while computing its total income for assessment to income-tax under the Act falls within the scope of the description “not includible in its total income” so as to attract the applicability of Rule 4 of Sch. II to the Surtax Act.
11. In order to understand the meaning and content of the expression “not includible in its total income as computed under the Income-tax Act” occurring in Rule 4 of Sch II to the Surtax Act it is necessary to refer to some of the provisions of the I.T. Act as it stood at the time of the enactment of the Surtax Act in 1964. Chapter III of the Act bears the heading “incomes which do not form part of total income”. Sections 10 and 11, which are contained in this chapter of the Act, lay down that in computing the total income in the previous year of a person any income falling within the scope of any of the descriptions given in the various clauses to these sections shall not be included. Chapter IV of the Act deals with the topic of “computation of total income” and Chap. V deals with cases where income of other persons has to be included in the assessee’s total income. The provisions of Chap. VI are not relevant for our present purpose. Chapter VI-A was introduced in the Act only in the year 1965 by the Finance Act, 1965. The provisions contained therein were later on substituted by the new Chap. VI-A introduced ‘by the Finance (No. 2) Act of 1967 containing Sections 80A to 80T. Section 80A(1) provides that in computing the total income of an assessee there shall be allowed from the gross total income, in accordance with and subject to the provisions of that chapter, the deductions specified in Sections 80C to 80VV (Sections 80U to 80VV were added in the Act subsequent to 1968).
12. The subject-matter now covered by Section 80G of the Act was originally dealt with under Section 15B of the Indian I.T. Act, 1922. The said provision
was re-enacted, in identical terms, assertion 88 in the I.T. Act, 1961 (the Act). Section 88 provided that subject to its terms and the limits specified therein the assessee shall be entitled to a deduction, from the amount of income-tax on his total income, with which he is chargeable for any assessment year, of an amount equal to the income-tax calculated at the average rate of income-tax on any sums paid by the assessee in the previous years as donations for charitable purposes, etc., to the funds and institutions of the nature referred to in the said section. It was only with effect from April 1, 1968, that Section 88 was omitted from the Act and the present provision contained in Section 80G was introduced in Chap. VI-A of the Act by the Finance (No. 2) Act, 1967.
13. Under Section 15B of the Indian I.T. Act, 1922, as well as under Section 88 of the Act, the relief granted in respect of donations made by the assessee to approved charitable institutions was by way of a rebate of tax. This necessarily implied that the amount given by way of donation was to be treated as part of the total income of the assessee and what was provided for was a proportionate deduction from the amount of income-tax. The determination of the net tax liability was to be made by applying the procedure laid down in Section 110 of the Act (corresponding to Section 17(2) of the 1922 Act). Under this procedure the amount of income-tax with which the assessee is chargeable on his total income was first to be computed, then the rate average of income-tax was to be arrived at by dividing the amount of income-tax by the total income, thereafter the qualifying amount of donation eligible for relief under Section 88 (s. 15B of the old Act) was to be multiplied by the said average rate and the resultant sum deducted from the income-tax payable by the assessee. Similar provisions for the grant of rebate were contained in the Act in respect of some other types of expenditure also incurred by assessees. It was with a view to replace this complicated procedure of grant of rebates by the simpler method of providing for straight deductions in the computation of the total income that Chap. VI-A was introduced into the Act by the Finance Act, 1965, with effect from April 1, 1965. The chapter, as it was originally introduced then, contained only Sections 80A to 80E and those provisions did not cover the subject-matter of relief in respect of donations made to charitable institutions. By the Finance (No. 2) Act, 1967, Sch. III, Chap. VI-A, as it originally stood, was omitted and a new chapter was substituted containing Sections 80A to 80T. The legislative intention underlying the introduction of the new Chap. VI-A in the Act and the inclusion of Section 80G therein is clearly discernible from the following extract from the Notes on Clauses published along with the Finance (No. 2) Bill, 1967 :
“Item 13 of the Third Schedule seeks to substitute a new Chapter for Chapter VI-A of the Income-tax Act. The new Chapter VI-A seeks, inter alia, to replace the existing provisions for grant of full or partial rebate of tax at the average rate of tax or charging of tax at a concessional rate on certain items of income or payments, contained in Chapter VII, Chapter VIII and Chapter XII of the Income-tax Act, by provisions for allowing a straight deduction of the whole or a specified percentage of the amount qualifying for the rebate or concessional rate of tax, in computing the total income. The provisions of Sections 80A to 80E of the existing Chapter VI-A also find a place in the new Chapter with certain modifications. The new Chapter VI-A also incorporates certain new. provisions.
New Section 80A lays down certain general principles which are relevant for the purposes of the deductions to be allowed in computing the total income under new Sections 80C to 80T. In particular, Section 80A(2) limits the aggregate of these deductions to the gross total income of the assessee, i.e., the total income as computed under the provisions of the Income-tax Act before making any deduction under Chapter VI-A or for annuity deposit under Section 280-O of that Act and without applying the provisions of Section 64 of that Act. Section 80A(3) provides that where a deduction has been allowed under new Section 80G or 80H or 80J or 80K or 80L or 80S or 80T in computing the total income of a firm, association of persons or body of individuals, no deduction under the same section shall be allowed in computing the total income of a partner of the firm or a member of the association or body, in relation to his share in the income of the firm, association or body……
New Section 80G seeks to replace the existing Section 88 of the Income-tax Act. The new section provides for a straight deduction of 50 per cent. of the qualifying amount of donations in computing the total income of all categories of taxpayers. In other respects, the provisions of the new section correspond to the provisions of the existing Section 88 (as sought to be amended by Clause 26 of the Bill), which, in consequence, is sought to be omitted by item 15.”
14. Section 88 was contained in Chap. VIII of the Act which contains provisions dealing with the topic “relief in respect of income-tax”. The heading given to Chap. VI-A wherein Section 80G is contained is “Deduction to be made in computing total income”. Section 80G appears in that chapter under the sub-heading “Deductions in respect of certain payments”. As already noticed, under the scheme of Section 15B of the Indian I.T. Act, 1922, as well as of Section 88 of the (1961) Act the amounts, in respect of which rebate of tax was admissible, were to be treated as forming part of the total income of the assessee chargeable to tax. The introduction of Chap. VI-A
containing, inter alia, Section 80G only brought about a change in the procedure of granting the said relief by substituting the simpler mode of straight deduction of the expenditure in the place of the original system of grant of rebate of tax. Even under the scheme of Chap. VI-A the amount in respect of which relief is claimed under Section 80G continues to form part of the total income of the assessee and it is thus “includible in its total income” but, in case the assessee claims the benefit of a deduction and proves to the satisfaction of the ITO that the conditions mentioned in Section 80G are duly satisfied, then, and then alone, a deduction will be made from the total income in respect of such amount. What Sections 80C to 80GG provide for is the grant of the relief of deductions in respect of certain types of expenditure incurred by the assessee subject to the conditions specified therein being duly satisfied. They are not provisions for excluding any part of an assessee’s income from its includibility in the total income.
15. We do not, therefore, find it possible to uphold the contention advanced on behalf of the revenue that where a company has been granted relief under Section 80G in respect of an amount paid by the assessee by way of donations such amount would constitute, for the purposes of Rule 4 of Sch. II to the Surtax Act, a part of the income, profits and gains of the company “not includible in its total income as computed under the Income-tax Act”. There are certain categories of income which by reason of their special nature are treated by the Act as not liable to be included in the total income and those categories are enumerated in Chap. III of the Act. We are clearly of opinion that it is only the types of the income falling within the scope of the provisions of Chap. III that are to be regarded as income “not includible” in the total income of a company for the purposes of Rule 4 of Sch. II to the Surtax Act.
16. We find that we are fully supported, in the view we have expressed above, by the decisions of the Karnataka, Madras and Bombay High Courts reported in Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399 (Kar), Addl. CIT v. Bimetal Bearings Ltd. [1977] 110 ITR 131 (Mad) and Commr. of Surtax v. Ballarpur Industries Ltd. [1979] 116 ITR 528 (Bom),
17. The conclusion that emerges from the foregoing discussion is that the Tribunal was perfectly right in holding that the amount of deduction allowed to the assessee under Section 80G of the Act is not to be treated as part of the income of the assessee-company “includible in its total income as computed under the Income-tax Act” within the meaning of the said expression contained in Rule 4 of Sch. II to the Surtax Act and hence the capital of the company is not liable to be decreased correspondingly while making a computation under the provisions of the said Schedule. The
questions referred in these two cases are accordingly answered in the affirmative, that is, in favour of the assessee and against the department. The parties will bear their respective costs.
18. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Tribunal, as required by law.
